UGC Approval No:40934 CASS-ISSN:2581-6403

“Mergers and Acquisition in Telecom Industry an

HEB CASS
Analysis of Financial Performance of Vodafone India
and Idea”
Author – Aparajita Lodha1 & Co-Author - Dr.Ritu Wadhwa2
1
Student, MBA, Amity Business School, Amity University, Uttar Pradesh
2
Asst. Professor, Amity Business School, Amity University, Uttar Pradesh

Address for Correspondence: editojohp@gmail.com

ABSTRACT
Telecommunication sector has seen increased mergers and acquisitions ever since Reliance Jio
(country’s largest 4G network) owned by Mr MukeshAmbaniinvested $25 billion into a Pan India
national 4G service, offering a free voice calls and tariffs well below prevailing rates in September 2016
with predatory pricing strategy.By the end February 2017, it had added 100 million customers, gaining
over six percent market share.
Since then reliance Jio has disrupted the business model of telecomm industry giants like Airtel,
Vodafone, Idea and as well as the government-run BSNL. All these telecomm operators have slashed
their prices many times to compete with Reliance Jio. There were other small players like Telenor,
MTS, Aircel, and MTNL which were planning to exit the telecomm industry for survival or planning
for consolidation.
As of march 2017, the three largest wireless carriers by subscribers were all the result of recently
completed tie-ups between previous telecomm operators. As a result in terms of subscribers, over 90%
of India’s wireless market is controlled by five companies namely Bharti Airtel, Vodafone, Idea,
Reliance Jio, and BSNL.

keywords: Consolidation, Mergers and acquisitions, predatory pricing strategy.

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Post-consolidation market share :(Based on data as of 31/12/2016)

Reliance Jio Tata other

6% 5% 2%

BSNL Vodafone +Idea

9% 35%

Aircel + RCOM
15%

Airtel+ telenor
28%
Graph based on data from TRAI

INTRODUCTION
This case study is all about merger which took place between two telecom giants. I.e. Vodafone India
and Idea cellular on 20th March 2017 for $23 billion, which would result in the biggest company
considering the number of subscriber base both the companies have.. The combined entity will have an
enterprise value of $23.2 billion. The new entity will be controlled jointly and equitably by Vodafone
and Idea. The merger will result in removal of Airtel from its apex position it enjoyed had since 15
years and aimed at creating a leader in terms of number of customers in India. The merger allows
Vodafone India and Idea to get a strong position by cutting costs and effectively competing with reliance
Jio.
keywords: enterprise value, mergers, subscriber base

OBJECTIVE
 To Study the financial performance of Vodafone post-merger
 To study the rationale behind the collaboration between Vodafone and Idea
Parties involved :
 Idea cellular ltd. :
Idea cellular limited is a Public limited company, headquartered in Mumbai, India. Idea cellular is the
third largest Indian mobile operator in terms of number of customers it serves offering to its client 2G,
3G and 4G mobile services. Shares of Idea cellular trade in National India Stock Exchange.
At its beginning (1985), AT &T wireless, Aditya Birla Group and Tata Group each held 1/3 of the
company. Nowadays Idea is controlled by Aditya Birla Group, the only surviving original shareholder.
Kumar Mangalam Birla a renowned Indian businessman is the chairman of Aditya Birla group and
exercises significant influence over the operations of Idea cellular.
 Vodafone :

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Vodafone is one of the world leading telecommunication companies, it was founded in year 1985 and
is based in London. Shares of Vodafone is traded on London stock exchange and NASDAQ. It came to
India in September 2007, after Vodafone Plc. Acquired a majority stake in Hutchinson Essar in May
2007.Journey of vodafone in india :

• Acquires Hutchison's 67% stake in Hutchisone Essar for $ 10.9 billion.

• Company renamed Vodafone Essar
2007 • Income-Tax department slaps Vodafone with Tax demand of Rs 11000 crore.

• Buys out Essar's 33% stake in Vodafone Essar for $ 5.4% billion, renames
company Vodafone India Ltd.
2011

• Vodafone wins tax case in the supreme court

• Piramal picks up 11% stake in Vodafone for $ 1.26 billion in two trances
• Government introduces retrospective taxation to recover over Rs 20000 crore
taxes, interest and penalty.
2012
• Vodafone initiates dispute settlement under the India Netherlands bilateral
investment treaty.

• Vodafone recieves approval to hike stake to 100%.

2013

• Vodafone and Indian government appoint an arbitratoreach in tax dispute.

2014

• Announces equity infusion of $7.2 billion in Indian business.

2016

• Announces merger with Idea Cellular.

2017

The deal highlights :

The merger between Vodafone and Idea was approved by NCLT Mumbai bench on 30th August 2018
which means the merger became effective from 31st August 2018. As per the scheme of arrangement,
Vodafone will combine its subsidiary in India i.e. Vodafone India(excluding its 42% stake in Indus

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UGC Approval No:40934 CASS-ISSN:2581-6403

tower) with Idea which is listed on Indian stock exchange. The combined entity is worth more than $23
billion.
The deal is said to be the merger of equals. The two companies agreed to merge their operation with a
swap ratio of 1:1 i.e. every one share held by shareholder of Idea will be exchanged by one share of the
merged company.
The deal has been structured in such a way that, on completion of this deal, Vodafone will end up getting
45.1% stake in combined entity and Aditya Birla Group owned by Kumar MangalamBirla will own
26.0% stake in merged entity after acquiring 4.9% from Vodafone for Rs 3875 crore, whereas, Idea’s
other stake holder will own the remaining 28.9% stake. Further Birla group will have a right to acquire
additional 9.5% stake from Vodafone over next 4 year from the date of merger to comply with the
condition of “merger of equals”, However, if equalisation is not achieved due to inability of Aditya
Birla Group to acquire these extra 9.5% stake from Vodafone then Vodafone is obliged to sell these
excess stake in share market. But till equalization is achieved, voting on excess stake held by Vodafone
is restricted and is to be exercised jointly as per the agreement of deal.

SHAREHOLDING PATTERN POST MERGER

Shareholders of
Idea Cellular
29%

Vodafone Plc
45%

Aditya Birla Group

26%

The merged entity known as “Vodafone Idea Ltd” will have 12 directors consisting6 independent
directors. Equal representation is being offered to both Aditya Birla group and Vodafone, the
chairmanship being offered to Mr Kumar Mangalam Birla.
The merger of Vodafone and idea will make it world’ssecond largest telecom company and India largest
telecom company.
Advisors :
 For Vodafone RobeyWarshaw and Morgan Stanley acted as lead financial advisors while Bank of
America Merrill Lynch. Kotak investment Bank, Rothschild and UBS acted as financial advisors.
 Idea cellular was advised by Goldman Sachs.

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Stock market reaction :

After the announcement of merger Vodafone’s share price jumped up by 3% and Idea’s share prices
soared more than 27% in India.
Rationale behind the merger :
Vodafone and Idea will both have annual savings of Rs 14000 crore in terms of operating expenditure
and capital expenditure which will be achieved by fourth full year of operation from the date of merger
as combined entity. The net present value of total savings is estimated at Rs 70,000 crore.
The merged entity will leverage Idea’s leadership in semi-urban and rural telecom markets and
Vodafone India’s strong presence in metro cities to serve pan-India audience and allow for nationwide
leadership within Indian guidelines of mergers and Acquisition.
The merger will help in growing the business of the companies thereby increasing the market value of
the shares owned by the shareholders and all other stakeholders.
With this merger a reduction in number of players in market would be witnessed thereby increasing
the ability to compete in market more effectively with some relief from bitter price war initiated by
Reliance Jio.
Merger conditions :
Department of telecommunication has given approval to the merger on the following conditions.
An upfront payment of Rs 7268 crore has to be made which is split between a bank guarantee of Rs
3342 crore to cover what Idea owes on account of one time spectrum charges and Rs 3926 cash which
Vodafone will pay for liberalising non-auctioned spectrum.
Among other conditions one such condition is that Idea needs to replace Vodafone’s bank guarantees
which is worth Rs 6452 crore held by DOT with its own.
Advantages :
People who are using Idea and Vodafone sim can expect better network coverage in cities and towns.
Consumers can expect more diverse services and access to newer and smarter technology like VoLTE,
Digital wallets and internet of things after the merger.
This merger will create India’s biggest telecom service provider having a customer base of over 394
billion. Which is more than that of Airtel who is having 263.35 million mobile subscribers.Further, it
will have 35% market share, a 41% revenue market share
Vodafone and Idea presently are the second and third largest telecom operators, respectively, in the
Indian telecom industry after the merger of these two entities they would emerge as an industry leader
replacing Bharti Airtel.
With the financial health of the sector being at its worst phase the merger of both the companies Idea
and Vodafone will help them to overcome their debts and large sum of credits will be infused in the
system.
It will help the government by contributing truly towards “Digital India” mission by enabling millions
of customers connect and build a better tomorrow.

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Challenges :
Integration of management of both the organisations will have to cope with cultural differences i.e. staff
working with a foreign MNC versus a home grown firm.
Vodafone Idea have at least 6 markets –Maharashtra, Gujarat, Kerala, Haryana, Madhya Pradesh and
west Bengal where there combined revenue market would exceed 50% hence they will need to bring
down its revenue market share below 50% as per M&A rules within a period of one year from the date
of consolidation.
In terms of spectrum limits, the combined entity will exceed the limit of 25% in four circles-namely
Gujarat, Haryana, Maharashtra and Kerala this excess spectrum is needed to be sold to comply with
M&A guidelines within one year from the date of merger.
Financial performance post-merger :
Q3FY19 Q 2FY19 Change (Rs) Change %
(Sept18-Dec18) (July18-Sept
18)
Year17-18 Year16-17
Sales turnover 11751.60 7663.50 4101.30 53.52%

Operating xpenses 10614.7 7202.2 3412.5 47.57%

EBITDA 1136.90 461.40 675.50 146.40%

PAT -5004.60 -5,016.10 -28.30 -0.56%
Equity share 8735.40 8735.10 0.30 00.00%
capital
EPS -5.73 -5.69 -0.04% -0.62%
EBITDA margin 9.67% 6.02% 3.64%

Profit after tax -42.88% -65.45% 22.58%

margin
The merger of Vodafone Idea with Idea cellular was completed on August 31, 2018, The Q2 FY19
results include results for idea cellular up to August 30, 2018 and results for Vodafone-Idea from
August 31, 2108 to September 30, 2018.
Source: Company Report, bloombergquint
*Results Consolidated

ANALYSIS
To analyse the financial performance of the sample case during post-merger period it has
beenobservedthat company’s turnover during quarter3 went upby 53.52%.

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EBITDA increased from 461 crore in Q2FY19 to 1136.90 crore in Q3FY19. EBITDA margin increased
from 6.02% to 9.67% during the same period.
There has been a decline in profit after tax by –0.56% on account of high finance cost, integration cost,
and mobile tower exit charges.Additionally, the major reason of declining profit is due to the intense
competition in the market which is because of the competitive tariff being offered by Reliance
JioInfocomm limited.
According to the CEO of the merged entity Mr Balesh Sharma the company is working well on track
to deliver its synergy targets by FY 2021.
Further notwithstanding the losses incurred by the company, it is said to raise Rs11000 crore from
Vodafone group and Aditya Birla group and infuse the total Rs 25000 in the firm to ensure that company
has sufficient balance sheet flexibility to successfully execute its strategy.

LIMITATION OF THE STUDY

The study is based purely on secondary data which are taken from financial statements of the case
available on internet and hence ambiguity in the data can’t be denied.
Since merger took place on 31 August 2018 hence financial statement for the post-merger period
starting 1stApril 2018 to 31st March 2019 is currently not available therefore quarterly results have been
used instead.

CONCLUSION
Reliance Jio is the threat to most of the companies in telecommunication industry and to survive in this
cut throat competition mergers and acquisitions is seen taking place in industry. In the present case of
Vodafone-idea it can be said that Synergy benefits would gradually be achieved in coming years which
will result in higher profits and leverage is expected to reducehence resulting in value addition to
shareholder.As of now there is no gain to public shareholder, it is a loss making company posting a loss
of Rs 5003 crore loss in the December quarter.

REFERENCES
 https://www.livemint.com/Companies/liVpiwdNALGfOgccApI6sK/The-rationale-behind-
IdeaVodafone-merger-in-five-charts.html
 https://economictimes.indiatimes.com/markets/stocks/earnings/vodafone-idea-reports-rs-
5005-crore-q3-loss-approves-rights-issue-of-up-to-rs-25000-crore/articleshow/67868710.cms
 https://www.investxp.in/analysis-of-the-scheme-of-arrangement-of-the-vodafone-idea-
business-combination/
 https://www.indiatvnews.com/business/news-idea-vodafone-merger-all-that-you-need-to-
know-445271

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 https://www.motilaloswal.com/site/rreports/HTML/636222271139599794/index.htm
 https://www.livemint.com/Money/x4pHw55G3AYFzeHnlUaLYO/Why-are-Idea-shares-
falling-after-Vodafone-merger-announceme.html
 https://mnacritique.mergersindia.com/news/vodafone-pegs-5-billion-valuation-for-42-stake-
in-indus-towers/
 https://www.angelbroking.com/blog/how-much-will-the-idea-vodafone-merger-enhance-
shareholder-value
 https://economicsclubimi.com/2017/02/12/vodafone-idea-merger-how-it-will-change-the-
telecom-industry/

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